Bazooka or Nuclear Stimulus

It's far too early to declare anything about the coronavirus epidemic but the market reaction has been instructive – fiscal and central bank policy is overwhelming fundamentals. The pound was the top performer Thursday while the kiwi lagged. Stocks retreated slightly lower after the Fed announcd it was reducing the daily operations of its repo agreements, but will hold the monthly amount of t-bill purchases unchanged at $60 bn per month. Silver and CAD are at the top of the day's performers. US retail sales are due up next.

4,823 additional coronavirus cases were reported in Hubei, suggesting that the 15,000 reported a day earlier was an aberration due to the new methodology in counting infections.  Will be crucial to see if markets pullback late on Friday and Sunday  night as they did in the  last 3 weeks.

Risk trades dipped again Thursday and once again the dip was bought. Looking back at the past month, not once did US stocks finish a day on the lows and there were only two days where genuine risk aversion took hold.

It's remarkable how well equity markets have held up facing a near-complete shutdown in the world's second-largest economy and a genuine threat of a global pandemic. With another 5000 cases reported on Friday, perhaps that's the wrong reaction but if we take it at face value, it sends a discomforting message: That easy money has conquered economic anxiety. The trio of central banks promising to keep rates low indefinitely, quantitative easing and looser fiscal policy (excluding the eurozone) aren't just a bazooka, but a nuclear bomb. Greek bonds are now trading under 1%, need we say anymore?

Having said, take a look at what's going on market internals in Ashraf's piece yesterday.

Ultimately, inflation or currency debasement will spark a re-think but the structural forces of globalization, automation and demographics are keeping prices low. On Thursday, US CPI rose 2.5% y/y, up from 2.3% a month earlier but that will surely unwind in February with the cratering of energy prices.

In the short-term, we warn (as we did last week) that Fridays are a tough day for risk trades because of virus uncertainty. AUD/USD has fallen an average of 0.53% in the past three Fridays.

Also watch out for the January retail sales report at 1330 GMT. The consensus is for a 0.3% rise, matching the December number, which could also be revised.